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Facts
The assessee, M/s. Signode India Limited, filed an appeal against the order of the Assessing Officer (AO) who made an adjustment of Rs. 1,18,60,159/- on account of interest on outstanding trade receivables from its Associated Enterprises (AEs). The AO's action was based on the directions of the Dispute Resolution Panel (DRP) and the Transfer Pricing Officer (TPO).
Held
The Tribunal held that the interest on delayed receivables from AEs should be considered as a separate international transaction. It was also held that the credit period allowed by the assessee to its AEs should be benchmarked considering industry practices. Regarding the interest rate, the Tribunal directed the AO/TPO to use LIBOR + 200 basis points as the comparable rate.
Key Issues
Whether interest on delayed receivables from AEs can be imputed and treated as a separate international transaction, and what is the appropriate benchmark for interest rate and credit period for such transactions.
Sections Cited
143(3), 144C(13), 144B, 153, 92C(3), 92B, 10B
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Income Tax Appellate Tribunal, Hyderabad ‘B’ Bench, Hyderabad
Before: SHRI VIJAY PAL RAO & SHRI MADHUSUDAN SAWDIA
(निर्धारण वर्ा/Assessment Year:2021-22) M/s. Signode India Limited, Asst. Commissioner of Income Tax, Vs. Hyderabad. Circle 3(1), Hyderabad. PAN:AAHCS8120M (Appellant) (Respondent) निर्धाररती द्वधरध/Assessee by: Shri H. Srinivasulu, C.A. रधजस् व द्वधरध/Revenue by: Dr. Sachin Kumar, SR-DR सुिवधई की तधरीख/Date of hearing: 17/07/2025 घोर्णध की तधरीख/Pronouncement: 25/07/2025 आदेश/ORDER PER MADHUSUDAN SAWDIA, A.M. : This appeal is filed by M/s. Signode India Limited (“the assessee”), feeling aggrieved by the order passed by the Learned Assessing Officer (“Ld. AO”) u/s.143(3) r.w.s. 144C(13) r.w.s. 144B of the Income Tax Act, 1961 (“the Act”) dated 31.10.2024 for the A.Y. 2021-22.
The assessee has raised the following grounds of appeal :
“ 1. On the facts and circumstances of the case and in contrary to law, the Deputy Commissioner of Income-tax (Transfer Pricing Officer) – 3, (hereinafter referred to as the ‘Ld. TPO') and the Ld. AO under the directions issued by Hon'ble Dispute Resolution Panel – 1, Bengaluru (‘the Hon’ble DRP’) erred in making a Transfer Pricing addition of INR 1,18,60,159 to the Appellant's income and thereby, determining a total income of INR 184,73,99,248 and the said addition being wholly unjustified is liable to be deleted.
2. On the facts and in the circumstances of the case and contrary to law, the Ld. AO / TPO erred and the Hon’ble DRP further erred in upholding / confirming the action of the Ld. AO / TPO, in rejecting the transfer pricing analysis / study prepared by the Appellant and conducting fresh benchmarking, without appreciating that none of the conditions mentioned in clauses (a) to (d) of Section 92C(3) of the Act were satisfied.
That the final assessment order passed by the Ld. AO under Section 143(3) read with Section 144C(13) read with Section 144B of the Act is barred by limitation as the same is passed beyond the time limit prescribed under Section 153 of the Act and hence, the order is liable to be quashed. INTEREST ON RECEIVABLES 4. On the facts and in the circumstances of the case and contrary to law, the Ld. AO / Ld. TPO erred in and the Hon’ble DRP further erred in upholding / confirming the action of the Ld. AO / Ld. TPO in benchmarking outstanding receivables from Associated Enterprises (‘AEs’) as a separate international transaction, without appreciating that the principal international transactions resulting in such receivables have been found to be at arm’s length by the Ld. AO / TPO and hence a separate adjustment on account of interest on receivables is not warranted. Further, the margins earned by the Appellant are much higher compared to the comparable companies. Considering that the credit period allowed is closely and inextricably linked to the main transaction of sales / services, the margins already reflect the working capital adjustment.
5. On the facts and circumstances of the case and contrary to law, the Ld. AO / Ld. TPO erred in and the Hon’ble DRP further erred in upholding / confirming the action of the Ld. AO / Ld. TPO, in applying the short term deposit rate of State Bank of India (‘SBI’) to compute transfer pricing adjustment without undertaking proper benchmarking analysis and completely ignored the fact that, as a banking company, SBI is not engaged in a business, similar to the Appellant.
6. On the facts and circumstances of the case and contrary to law, the Ld. AO / Ld. TPO erred in and the Hon’ble DRP further erred in upholding / confirming the action of the Ld. AO / Ld. TPO, in not performing any separate benchmarking analysis to determine the arm's length credit period and arm's length interest rate and made an ad hoc adjustment in relation to outstanding receivables.
7. On the facts and circumstances of the case and in contrary to law, the Ld. AO / TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in not considering the fact that the Appellant is a debt-free company and did not charge any interest from creditor / supplier nor any interest has been earned from unrelated party.
8. On the facts and circumstances of the case and in contrary to law, the Ld. AO / TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in not considering the fact that the Appellant can only negotiate the terms of the trade and the Appellant, if it had an intention to charge interest would have so done and discussed the same with the AEs. In this regard, the business transaction has to be decided between two parties and there cannot be any presumption about charging of notional interest on such delayed payment.
9. On the facts and circumstances of the case and in contrary to law, the Ld. AO / TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. TPO in not considering the fact that the Appellant did not charge any interest on any delayed payment to Non-AEs / third parties as well and had followed parity in treatment between AEs and Non-AEs / third parties, which is in line with the Company’s policy adopted for the delayed payment from AEs. Further, such instance of not charging interest to Non AEs / third parties is a reliable comparable transaction in accordance with the provisions of section 92C(2) of the Income-tax Act, 1961 and Rule 10B of Income-tax Rules, 1962, and should have been considered by the Ld. AO / Ld. TPO while undertaking benchmarking analysis.
10. Without prejudice to the other grounds, on the facts and circumstances of the case and contrary to law, the Ld. AO / TPO erred in and the Hon'ble DRP further erred in upholding / confirming the action of the Ld. AO / TPO in not considering the fact that the weighted average credit period for the top four third- party customers of the Appellant (contributing 67% of third-party export revenue) is 102 days and the actual credit period extends to as long as 294 days. Even in such cases, the Appellant has not charged any interest from third party customers. Therefore, it is imperative that the Ld. AO / TPO should appreciate facts of the case and allow credit period of 90 to 120 days which is aligned with the practice adopted in the industry in which the Company operates.
11. Without prejudice to the other grounds, on the facts and circumstances of the case and contrary to law, the addition made by the Ld. AO / Ld. TPO with respect to interest on outstanding receivables is untenable and ought to be deleted since the addition has been made by computing interest on an invoice-to-invoice basis as against on a weighted average basis for all invoices raised during the year under consideration.
12. Without prejudice to the other grounds, on the facts and in the circumstances of the case and contrary to law, the Ld. AO / Ld. TPO erred in and the Hon’ble DRP further erred in not appreciating that interest on delayed receivables ought to be computed after taking into consideration the outstanding payables.
13. Without prejudice to the other grounds, on the facts and in the circumstances of the case and contrary to law, the Ld. AO / Ld. TPO erred in and the Hon’ble DRP further erred in upholding / confirming the action of the Ld. AO / Ld. TPO in considering the SBI’s short term deposit rates as the appropriate CUP instead of the LIBOR rate to benchmark the impugned interest on delay in receipt of outstanding receivables even though the receivables are denominated in foreign currency. The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal
, at any time before or at the time of hearing of the appeal, to enable the Hon’ble ITAT to decide this appeal according to law.”
3. The brief facts of the case are that the assessee is a company, engaged in the business of industrial packaging and manufacture of strap, stretch, protective packaging, packaging tools and equipments that are used to apply the bulk packaging material. The assessee filed its return of income for the Assessment Year 2021–22 on 14.03.2022, declaring a total income of Rs.183,55,39,089/-. In view of the international transactions involved during the year under consideration, for determination of Arm’s Length Price (“ALP”), the case was referred to Learned Transfer Pricing Officer (“TPO”). The Ld. TPO vide his order dated 31.10.2023 suggested upward adjustment of Rs.1,18,60,159/- on account of interest on trade receivables. Accordingly, the Ld. AO passed the draft assessment order on 12.12.2023.
4. Aggrieved with the draft assessment order passed by the Ld. AO, the assessee preferred objection before the Ld. DRP. In pursuance to the directions of Ld. DRP dated 05.09.2024, the Ld. AO finalized the assessment on 31.10.2024 at total income of Rs.184,73,99,248/- by making addition of Rs.1,18,60,159/- on account of interest on trade receivables.
Aggrieved with the final assessment order of Ld. AO, the assessee is in appeal before us. At the outset, the Learned Authorised Representative (“Ld.
AR”) submitted that, the sole issue arising out of the grounds of appeal pertains to the adjustment of Rs.1,18,60,159/- made by the Ld. AO on account of interest on outstanding trade receivables from it’s AEs. The submissions of the Ld. AR were manifold, and can be summarised as under :
5.1 First, the Ld. AR submitted that, the Ld. TPO, after examining the international transactions, proposed an adjustment of Rs.1,18,60,159/-on account of interest on delayed receivables from AEs, treating it as a separate international transaction under section 92B of the Act. The Ld. AR further submitted that the assessee did not charge any interest on outstanding receivables, either from its AEs or from its non-AEs. The Ld. AR invited our attention to the balance sheet of the assessee as on 31st March 2021, placed at page no. 77 of the paper book, and submitted that the total outstanding receivables as on that date amounted to Rs.328.10 crores. It was further submitted that the receivables from AEs were only Rs.42.17 crores, constituting 12.84% of the total receivables, while the balance 87.16% pertained to non-AE transactions. Hence, the assessee followed a uniform commercial policy of not charging interest from any customer. Since the trade receivables from AEs were also not interest-bearing, the Ld. AR argued that no notional interest should be imputed merely because the customer is an AE. He accordingly contended that the addition of Rs.1,18,60,159/-made by the TPO on account of interest is unwarranted and liable to be deleted.
5.2 The other argument advanced by the assessee was with regard to the allowance of a credit period of 60 days by the Ld. TPO. In this regard, the Ld. AR submitted that, based on the ageing analysis of the top four third-party export customers, who together contributed approximately 67% of the assessee’s total export revenues, a longer credit period is commercially prevalent. The Ld. AR invited our attention to the ageing analysis and weighted average collection period of these top four export customers, placed at page nos. 6 to 19 of paper book No. 2, and submitted that the credit period allowed to these customers ranged from 5 days to 294 days. It was further submitted that, as per available industry data, the average credit period ranges from 90 to 120 days. Accordingly, the Ld. AR prayed before the Bench to allow a credit period of 294 days while computing interest on trade receivables from AEs.
5.3 The next argument of the assessee was with regards to setoff of outstanding trade payables from the outstanding Trade receivables. In this regard, the Ld. AR submitted that, the assessee has trade payables of Rs.13,48,54,513/- due to its AEs. However, the AEs does not charge any interest on such trade payables. Accordingly, the Ld. AR prayed before the bench for setoff of interest free trade payable of AEs from trade receivable of AEs for the purpose of benchmarking of interest on outstanding trade receivable from AEs.
5.4 The next argument of the assessee was with regards to the application of rate of interest. In this regards, the Ld. AR submitted that, the Ld. TPO erred in applying the interest rate charged by SBI on short term deposits for benchmarking the interest on outstanding trade receivables from AEs. The Ld. AR further submitted that, this Tribunal in many cases has held that the interest on trade receivables should be benchmarked at LIBOR +200 basis points. Accordingly, the Ld. AR prayed before the bench to direct the Ld. TPO to apply the LIBOR + 200 basis points on trade receivables.
5.5 In their last argument, the Ld. AR submitted that the assessee had undertaken various international transactions relating to sale of traded goods, sale of manufactured goods and provision of marketing support services (“primary transactions”) with its AEs. All such primary transactions were accepted by the Ld. TPO to be at ALP, and no adjustment was made in respect of these transactions. It was submitted that the interest on outstanding trade receivables cannot be considered as a separate international transaction when the principal transaction is already accepted to be at ALP and the profit margin of the assessee is higher than that of the comparables. The Ld. AR relied on the decision of the ITAT in the case of ACIT Vs. Informatiuon Systems Resource Centre Pvt. LTd. (ITA No.7757/Mum/2012 dated 29.05.2015 (ITAT-Mum) and other decisions to support this contention.
Per contra, the Ld. DR relied on the order of Ld. AO/TPO . However, as far as the chargeability of rate of interest is concerned, the Ld. DR submitted that this Tribunal in the case of Hetero Lab Limited Vs. ACIT in & 313/Hyd/2023 has upheld the application of SBI short term deposit rate for benchmarking the interest on trade receivables. Accordingly, the Ld. DR argued that the rate applied by the Ld. TPO is correct and should be upheld in accordance with the decision of this Tribunal in the case of Hetero Lab Limited (supra).
We have heard the rival submissions and carefully perused the material available on record. As far as the first argument of the assessee is concerned, the issue before us is whether interest on delayed receivables from AEs can be imputed and treated as a separate international transaction under section 92B of the Act, even though the assessee claims to have a uniform policy of not charging interest from either AEs or non-AEs. At the outset, it is pertinent to note that Explanation (i)(c) to section 92B(2), inserted by the Finance Act, 2012 with retrospective effect from 01.04.2002, specifically includes receivables as an international transaction, where they arise from the business arrangements between AEs. Thus, the mere fact that a receivable exists from an AE and that such receivable remains unpaid beyond a reasonable credit period, brings it within the ambit of section 92B of the Act. Accordingly, the contention of the assessee that the assessee did not charge any interest on outstanding receivables, either from its AEs or from its non-AEs, hence no adjustment on account of interest on outstanding trade receivables from it's AEs is required, is devoid of merit and the same is hereby rejected.
7.1 As far as the issue of credit period is concerned, we note that the learned TPO allowed a credit period of 60 days. Considering the facts and circumstances of the case, we find no infirmity in the action of the Ld. TPO in adopting a credit period of 60 days for benchmarking purposes. Accordingly, this contention of the assessee stands dismissed.
7.2 As far as the setoff of outstanding trade payables from the outstanding trade receivables is concerned, we found that the similar issue have been decided by this Tribunal in the case of Microchip Technology (India) Private wherein this Tribunal at para no. 20 of the order held as under :
“20. In so far as the prayer of the assessee in respect of set off of the trade receivables and payables and the deemed interest thereon, is concerned, learned AR placed reliance on the decision of the coordinate Bench in the case of Coim India Pvt.Ltd Vs. DCIT in ITA No.495/Del/2021. We find it reasonable because, when the assessee has both trade receivables and trade payables, it would be unreasonable to calculate interest only on trade receivables for the purpose of determining the ALP of the transaction. It would be in the interest of justice to direct the learned Assessing Officer/learned TPO to consider both trade payables and trade receivables for the purpose of notional interest to be charged for determining the ALP value of the transaction. We hold and direct so.” 7.2.1 On perusal of above, we found that this Tribunal has held that, for benchmarking of notional interest the amount of trade receivables as well as trade payables should be considered. Respectfully following the finding of this tribunal, we deem it appropriate to set aside the issue to the file of Ld. AO/Ld.
TPO with a direction to recompute the adjustment of interest on trade receivables after considering the interest free trade payables due to AEs with duration of outstanding receivable and payables.
7.3 As far as the appropriate interest rate to be applied for trade receivables from foreign AEs is concerned, we find that an identical issue has been dealt by this Tribunal in the case of HARSCO India Private Ltd. v/s DCIT in dated 06/03/2025, wherein at para no. 6 to 10 of the order this Tribunal has held as under :
“6. It is pertinent to note that, not following the decisions of the Tribunal in assessee’s own case amounts to judicial indiscipline on the part of the DRP. However, since the issue has now come up before the Tribunal, therefore, we will discuss the merits of this issue. The basic question before us is, whether for benchmarking the outstanding receivables from AEs, the comparable interest rate should be PLR rate/SBI short term rate or LIBOR rate/LIBOR+ mark up. This issue was considered by the Chennai Special Bench of this Tribunal in case of Shiva Industries & Holdings Ltd. v. Assistant Commissioner of Income- tax reported in 46 SOT 112/11 Taxmann.com 404 (SB) and held in para 11 as under: “11. We have considered the rival submissions. A perusal of the order of the TPO clearly shows that the assessee had raised the funds by way of issuance of 0 per cent optional convertible preferential shares. Thus, it is noticed that the funds raised by the assessee company for giving the loan to India Telecom Holdings Ltd., Mauritius, which is its Associated Enterprises and which is the subsidiary company, is out of the funds of the assessee company. It is not borrowed funds. The assessee has given the loan to the Associated Enterprises in US dollars. The assessee is also receiving interest from the Associated Enterprises in Indian rupees. Once the transaction between the assessee and the Associated Enterprises is in foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm's length interest rate in respect of the transaction between the assessee and the Associated Enterprises. As it is noticed that the average of the LIBOR rate for 1-4-2005 to 31-3-2006 is 4.42 per cent and the assessee has charged interest at 6 per cent which is higher than the LIBOR rate, we are of the view that no addition on this count is liable to be made in the hands of the assessee. In the circumstances, the addition as made by the Assessing Officer on this count is deleted.”
7. Thus, a transaction of loan to the AEs in foreign currency is considered as international transaction between the assessee and its AEs, then the transaction would have to be looked upon by applying the commercial principles in regard to the international transactions. Therefore, the domestic prime lending rate or domestic deposit rate would have no applicability on international transaction, but the international rate being London Interbank Offered Rate (LIBOR) or similar rate i.e. Euro Interbank Offered Rate (EURIBOR) would govern the international transactions of lending by the assessee to the AEs. This issue also came up for consideration before the Hon'ble Delhi High Court in the case of CIT vs. Cotton Naturals (I) Private Ltd, reported in 276 CTR 445 (Del.) and the Hon'ble Delhi High Court has held in para 35 to 40 as under:
“35. The LIBOR rate plus markup or the interest rate prevailing in the United States at that time, i.e. 2003 have not been examined and are not the basis on which the TPO made the adjustment and compute the interest rate for the transaction under consideration. It claimed that the LIBOR rates in the year 2002 varied between 1.447 % to 3.006 % and in the year 2003 between 1.201% to 1.487%. Rates in the year 2004 were again marginal, with the highest at 3.100% and the lowest at 1.340%. The LIBOR rate of 5.224% quoted in the TPO's order, it is pointed out, was the rate received on the investment made during the assessment year in question by the assessed. Thus, it was argued that the present case is of a long-term loan granted to the AE and the rate of interest charged was much higher than the then prevailing LIBOR interest rate. There is no finding of the TPO, the DRP or the Assessing Officer questioning the long-term transaction as such.
Under sub-rule (4) to Rule 10B, the data used for comparability of the uncontrolled transaction should be the data relating to the financial year in which the international transaction has been entered into. The proviso permits consideration of data, not more than two years prior to the financial year, if such data reveals facts which would have influenced determination of transfer price in relation to the transaction being compared. The transaction in question was entered into in the year 2002-03 when the loans were granted to the AE. This was the financial year of the international transaction. Payment of interest is also an international transaction but would have reference to the year in which the loan was granted in case of a long term loan. However, in such situations, question may arise whether the case would fall under the second exception mentioned in the case of E.K.L. Appliances (supra), when an AE has the right to recall and ask for repayment of loan. These aspects have not been considered and applied by the TPO, DRP and the Assessing Officer. Neither has this ground been argued before us on behalf the Revenue. We, therefore, would not proceed to examine the said aspect and leave the question open. Similarly, we have not expressed any opinion on the issue or question of "thin capitalization" which does not arise for consideration in the present case.
We observe that whatever the Revenue argues and submits in the case of outbound loans or for that matter what we have observed would be equally applicable to inbound loans given to Indian subsidiaries of foreign AEs. The parameters cannot be different for outbound and inbound loans. A similar reasoning applies to both inbound and outbound loans. Revenue has erroneously argued that different parameters would apply for inbound and outbound loans, which is not acceptable.
The DRP referred to the PLR rates fixed in India. It is evident that the PLR rates were not the basis for fixing the arm's length price. Both TPO and the DRP have referred to the PLR rates only by way of analogy so as to state the prevailing interest rates in India, but while applying CUP method for comparability, they had applied LIBOR rates prevailing and had applied a mark-up of 700 points on account of low credit rating of the subsidiary AE and the cost of transaction.
The question whether the interest rate prevailing in India should be applied, for the lender was an Indian
company/assessee, or the lending rate prevalent in the United States should be applied, for the borrower was a resident and an assessee of the said country, in our considered opinion, must be answered by adopting and applying a commonsensical and pragmatic reasoning. We have no hesitation in holding that the interest rate should be the market determined interest rate applicable to the currency concerned in which the loan has to be repaid. Interest rates should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of residence of either party. Interest rates applicable to loans and deposits in the national currency of the borrower or the lender would vary and are dependent upon the fiscal policy of the Central bank, mandate of the Government and several other parameters. Interest rates payable on currency specific loans/ deposits are significantly universal and globally applicable. The currency in which the loan is to be re-paid normally determines the rate of return on the money lent, i.e. the rate of interest. Klaus Vogel on Double Taxation Conventions (Third Edition) under Article 11 in paragraph 115 states as under:— "The existing differences in the levels of interest rates do not depend on any place but rather on the currency concerned. The rate of interest on a US $ loan is the same in New York as in Frankfurt-at least within the framework of free capital markets (subject to the arbitrage). In regard to the question as to whether the level of interest rates in the lender's State or that in the borrower's is decisive, therefore, primarily depends on the currency agreed upon (BFH BSt.B1. II 725 (1994), re. 1 § AStG). A differentiation between debt-claims or debts in national currency and those in foreign currency is normally no use, because, for instance, a US $ loan advanced by a US lender is to him a debt- claim in national currency whereas to a German borrower it is a foreign currency debt (the situation being different, however, when an agreement in a third currency is involved). Moreover, a difference in interest levels frequently reflects no more than different expectations in regard to rates of exchange, rates of inflation and other aspects. Hence, the choice of one particular currency can be just as reasonable as that of another, despite different levels of interest rates. An economic criterion for one party may be that it wants, if possible, to avoid exchange risks (for example, by matching the currency of the loan with that of the funds anticipated to be available for debt service), such as taking out a US $ loan if the proceeds in US $ are expected to become available (say from exports). If an exchange risk were to prove incapable of being avoided (say, by forward rate fixing), the appropriate course would be to attribute it to the economically more powerful party. But, exactly where there is no 'special relationship', this will frequently not be possible in dealings with such party. Consequently, it will normally not be possible to review and adjust the interest rate to the extent that such rate depends on the currency involved. Moreover, it is questionable whether such an adjustment could be based on Art. 11 (6). For Art. 11(6), at least its wording, allows the authorities to 'eliminate hypothetically' the special relationships only in regard to the level of interest rates and not in regard to other circumstances, such as the choice of currency. If such other circumstances were to be included in the review, there would be doubts as to where the line should be drawn, i.e., whether an examination should be allowed of the question of whether in the absence of a special relationship (i.e., financial power, strong position in the market, etc., of the foreign corporate group member) the borrowing company might not have completely refrained from making investment for which it borrowed the money."
The aforesaid methodology recommended by Klaus Vogel appeals to us and appears to be the reasonable and proper parameter to decide upon the question of applicability of interest rate. The loan in question was given in foreign currency i.e. US $ and was also to be repaid in the same currency i.e. US $. Interest rate applicable to loans granted and to be returned in Indian Rupees would not be the relevant comparable. Even in India, interest rates on FCNR accounts maintained in foreign currency are different and dependent upon the currency in question. They are not dependent upon the PLR rate, which is applicable to loans in Indian Rupee. The PLR rate, therefore, would not be applicable and should not be applied for determining the interest rate in the extant case. PLR rates are not applicable to loans to be re-paid in foreign currency. The interest rates vary and are thus dependent on the foreign currency in which the repayment is to be made. The same principle should apply.”
8. The Hon'ble High Court has answered the question whether the interest rate prevailing in India should be applied for the lender who is an Indian Company/Assessee or the lending rate prevailing in the US, the place of the AE should be applied. The Hon'ble High Court has held that the interest rate should be the market determined rate applied to the currency concerned in which the loan has to be repaid. The interest rate should not be computed on the basis of interest payable on the currency or legal tender of the place or the country of resident of either party. Once the loan or credit is given in foreign currency and also to be repaid in same currency, the interest applicable to loan granted and to be returned in Indian rupee would not be the relevant comparable. The Hon'ble High Court has held that the PLR rate would not be applicable and should not be applied for determining the interest rate in such cases where loan to be repaid in foreign currency. This issue was again considered by the Hon'ble Bombay High Court in the case of CIT vs. Tata Autocomp Systems Ltd reported in (2015) 56 Taxmann.com 206 (Bom.) and the Hon'ble Bombay High Court has upheld the decision of the Tribunal directing the Assessing Officer to benchmark the interest at the prevailing EURIBOR rate instead of rupee loan rate to be computed at Arms’ Length on the loan advanced to the AE. The relevant findings of the Hon'ble High Court in para 7 & 8 are as under:
“7. We find that the impugned order of the Tribunal inter alia has followed the decisions of the Bombay Bench of the Tribunal in cases of VVF Ltd. v. Dy. CIT [IT Appeal No. 673 (Mum.) of 2006] and Dy. CIT v. Tech Mahindra Ltd. [2011] 12 taxmann.com 132/46 SOT 141 (Mum.) (URO) to reach the conclusion that ALP in the case of loans advanced to Associate Enterprises would be determined on the basis of rate of interest being charged in the country where the loan is received/consumed. Mr. Suresh Kumar the learned counsel for the revenue informed us that the Revenue has not preferred any appeal against the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra) on the above issue. No reason has been shown to us as to why the Revenue seeks to take a different view in respect of the impugned order from that taken in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra). The Revenue not having filed any appeal, has in fact accepted the decision of the Tribunal in VVF Ltd. (supra) and Tech Mahindra Ltd. (supra).
8. In view of the above we see no reason to entertain the present appeal as in similar matters the Revenue has accepted the view of the Tribunal which has been relied upon by the impugned order. Accordingly, we see no reason to entertain the proposed questions of law.”
9. We further note that, the Pune Benche of the Tribunal in the case of DCIT vs. iGATE Global Solutions Ltd reported in (2019) 109 Taxmann.com 48 (Pune) has again discussed this issue elaborately in Para 4 to 10 as under: “4. We have heard both the sides and gone through the relevant material on record. It is observed from the order passed by the TPO that the assessee advanced loans to its two AEs, one in the USA and the other in Germany. Insofar as loan to Symphoni Interactive LLC, an Associated Enterprise in the USA is concerned, the assessee charged interest @ 6%. The ld. CIT(A) has recorded that the assessee also paid interest to another AE in the USA, namely, iGATE Corporation, USA at 5.9% on its External Commercial Borrowings (ECB). He further recorded in para 57 of the impugned order that the TPO accepted this transaction and made no transfer pricing adjustment on this score, thereby, he also impliedly accepting this transaction at ALP. The viewpoint of the ld. CIT(A) on this point is not fully correct. We have noted above that the TPO worked out the transfer pricing adjustment by considering the loans advanced by the assessee to both of its AEs, including Symphoni Interactive LLC, USA. Be that as it may, it is seen that the ld. CIT(A) also impliedly accepted the interest earned by the assessee from Symphoni Interactive LLC, USA, at 6% as at ALP, against which the Department has no grudge as the assail is only to the application of EURIBOR of 4.42%, which relates to the loan advanced by the assessee to Mascot GmbH, Germany. As such, we are confining ourselves only to international transaction of receipt of interest from Mascot GmbH, Germany. As against the assessee charging interest at the rate of 1.50% from Mascot GmbH, Germany, the TPO determined the arm's length rate of interest at 14%, which the ld. CIT(A) reduced to 4.42% by treating it as the average EURIBOR rate for the year under consideration.
5. There are two facets of the dispute raised by the Revenue on this issue. The first is that the rate of interest should be considered with reference to the prime lending rate prevalent in India and the second is that the reduction in rate to 4.42% by the ld. CIT(A) is not justified.
6. As against the TPO's point of view that since the assessee in India advanced loan to its AE in Germany, which if not given, would have fetched interest @14% in India, the ld. CIT(A) has held that interest rate prevalent in the country in which the loan is received, should be considered for determining the ALP of transaction of interest received. We find that there is almost judicial consensus ad idem at the higher appellate forums on the question of which country, that is the borrower or the lender, should be considered for determining the arm's length rate of interest on loans advanced to the AEs. The Hon'ble Bombay High Court in CIT v.Tata Autocomp Systems Ltd . [2015] 56 taxmann.com 206/230 Taxman 649/374 ITR 516 has held that the ALP in case of loan advanced to AEs should be determined on the basis of rate of interest charged in the country where loan is received. The Hon'ble Delhi High Court in CIT v. Cotton Naturals (I) (P.) Ltd. [2015] 55 taxmann.com 523/231 Taxman 401 has also held that the currency in which the loan is to be repaid normally determines the rate of return on the money lent, i.e. rate of interest. The Hon'ble Bombay High Court in CIT v. The Great Eastern Shipping Co. Ltd. [2018] 301 CTR 642 has reiterated that the arm's length rate of interest is to be considered with reference to the country in which the loan is received and not from where it is paid. In view of these precedents, it is palpable that the viewpoint of the AO in considering the rate of interest prevalent in India, being, the lender country, as determinative of the ALP of rate of interest charged by the assessee, is not correct. To this extent, we uphold, in principle, the view canvassed by the ld. CIT(A) that the rate of interest prevalent in Germany, being, the country in which the loan was consumed, is determinative of the arm's length rate of interest charged by the assessee-lender.
7. Now we espouse the second facet of the dispute relating to the determination of the arm's length rate of interest. It is seen that the ld. CIT(A) has held that average EURIBOR for the A.Y. 2007- 08 should be considered as a benchmark. In determining the average EURIBOR at 4.42%, he relied on an order passed by the Tribunal in which the average LIBOR was considered at 4.42%. In other words, the ld. CIT(A) considered EURIBOR as a comparable uncontrolled transaction for the purpose of benchmarking the rate of interest charged by the assessee.
8. At this juncture, we consider it expedient to clarify that EURIBOR (Euro Inter-bank Offered Rate) is not a rate of interest, in itself, at which loans are advanced by banks in Euros to borrowers. EURIBOR is a reference rate which is calculated from the average interest rate at which Euro Zone Banks offer lending on inter-bank market. While calculating EURIBOR, 15% of the lowest and 15% of the highest interest rates collected by a panel of European banks are eliminated and the remaining 70% form the basis for its calculation. In such circumstances, EURIBOR, being, not an average rate at which the loans are advanced by European banks to borrowers, cannot per se be characterized as a comparable uncontrolled rate of interest at which loans are advanced in Germany.
9. On lines of EURIBOR, there is LIBOR (London Inter-bank Offered Rate), another rate which is applied on behalf of British Bankers Association. Similar to EURIBOR, LIBOR is also a rate at which major global banks lend to one another in the international inter-bank market on short-term basis. In calculation of LIBOR, 25% of lowest and 25% of the highest values are eliminated and the remaining 50% are considered for determining LIBOR. Therefore, LIBOR, as such, can also not be construed as a comparable uncontrolled transaction. The Hon'ble Bombay High Court in CIT v. Aurionpro Solutions Ltd. [2017] 99 CCH 70 approved the action of the Tribunal in considering LIBOR +2% as the arm's length rate as against the TPO applying LIBOR plus 3%. Drawing an analogy from this position, we hold that EURIBOR+2% should be considered as arm's length rate of interest for determining the ALP of the international transaction of interest received by the assessee from Mascot Systems GmbH, Germany.
10. Before parting with this issue, we would like to clarify that the ld. CIT(A) has considered 4.42% as EURIBOR applicable for the assessment year under consideration by relying on an order of the Tribunal, in which the average LIBOR was considered at this level. Equality of LIBOR and EURIBOR could not be substantiated from any material on record. In the given circumstances, we set aside the impugned order and remit the matter to the file of the AO for considering EURIBOR +2% as arm's length rate of interest to be applied on loan advanced by the assessee to Mascot Systems GmbH, Germany. In case EURIBOR +2% turns out to be lower than 4.42% as directed to be applied by the ld. CIT(A) on the understanding of the same being EURIBOR simplicitor, then the addition should be restricted with reference to 4.42% rate of interest, as the assessee is not in appeal on this issue. In the otherwise scenario, the relief allowed by the ld. CIT(A) will be restricted pro tanto.”
10. Therefore, we find force in the assessee’s case to adopt LIBOR rate for benchmarking the transactions of outstanding receivables from the AEs. Accordingly, the Assessing Officer/TPO is directed to adopt the LIBOR + 200 basis as comparable rate for benchmarking the transaction of outstanding receivables from AEs after allowing a credit period of 60 days as a normal credit period without any interest.”
7.3.1 On perusal of above, we found that this Tribunal has adopted LIBOR rate for benchmarking the transactions of outstanding receivables from the AEs.
We have also gone through the decision of this tribunal in the case of Hetero Lab Limited Vs. ACIT(supra) relied by the revenue and found that, the Tribunal has given it’s findings relying on the decisions of some Tribunals, however, this Tribunal in the case of HARSCO India Private Ltd. v/s DCIT (supra) has given it’s findings relying on the decisions Hon’ble Bombay high court. In our considered opinion the decision of hon’ble high court always prevails over the decision of Tribunal. Therefore, respectfully following the decision of this Tribunal in the case of HARSCO India Private Ltd. v/s DCIT (supra), we hold that, the justice will be served by applying LIBOR + 200 basis points on trade receivables in the case of the assessee. Therefore, we direct the Ld. AO/TPO to apply LIBOR + 200 basis points for benchmarking of interest on trade receivables.
7.4 As far as the last argument of the assessee is concerned, it is undisputed that the Ld. AO/TPO has accepted all primary international transactions to be at ALP. We have gone through the para nos.11 to 13 of ACIT Vs. Information Systems Resource Centre Pvt. Ltd. (supra), which is to the following effect :
We have considered the rival submissions as well as the relevant material on record. In the present case, the sale transaction of the assessee with its A.E. have been accepted by the Transfer Pricing Officer / Assessing Officer at arm's length and no adjustment has been made in respect of the sale transaction. However, the Transfer Pricing Officer has made the adjustment on account of credit period provided by the assessee to the A.E. on realisation of sale proceeds. At the outset, we note that an identical issue has been considered by the co ordinate bench of the Tribunal, Mumbai Benches, in Goldstar Jewellery Ltd. (supra), vide Para– 8, held as under:–
“8. We have considered the rival submissions and relevant material on record. The assessee has reported international transaction in its TP report regarding sale to its AE from manufacture of jewellery units and diamond trading unit. The TPO accepted the price charged by the assessee from AE at arm’s length. However, the TPO has made the adjustment on account of notional interest for the excess period allowed by the assessee to AE for realization of dues. The TPO applied 18.816% per annum as arm’s length on the over due amounts of AE and proposed adjustment of Rs. 2,49,95,139/-. The DRP though concurred with the view of the Assessing Officer/TPO on the issue of international transaction, however, the adjustment was reduced by applying the interest rate of 7% instead of 18.816% applied by the TPO. The first issue raised by the assessee is whether the aggregate period extended by the assessee to the AE which is more than the average credit period extended to the non-AE would constitute international transaction. We are of the view that after the insertion of explanation to section 92B(1), the payment or deferred payment or receivable or any debt arising during the course of business fall under the expression international transaction as per explanation. Therefore, in view of the expanded meaning of the international transaction as contemplated under clause (i) (e) of explanation to section 92B(1), the delay in realization of dues from the AE in comparison to non-AE would certainly falls in the ambit of international transaction. However, this transaction of allowing the credit period to AE on realization of sale proceeds is not an independent international transaction but it is a closely linked or continuous transaction along with sale transaction to the AE. The credit period allowed to the party depends upon various factors which also includes the price charged by the assessee from purchaser. Therefore, the credit period extended by the assessee to the AE cannot be examined independently but has to be considered along with the main international transaction being sale to the AE. As per Rule 10A(d) if a number of transactions are closely linked or continuous in nature and arising from a continuous transactions of supply of amenity or services the transactions is treated as closely linked transactions for the purpose of transfer pricing and, therefore, the aggregate and clubbing of closely linked transaction are permitted under said rule. This concept of aggregation of the transaction which is closely linked is also supported by OECD transfer pricing guidelines. In order to examine whether the number of transactions are closely linked or continuous so as to aggregate for the purpose of evaluation what is to be considered is that one transaction is follow-on of the earlier transaction and then the subsequent transaction is carried out and dependent wholly or substantially on the earlier transaction. In other words, if two transactions are so closely linked that determination of price of one transaction is dependent on the other transaction then for the purpose of determining the ALP, the closely linked transaction should be aggregated and clubbed together. When the transaction are influenced by each other and particularly in determining the price and profit involved in the transactions then those transactions can safely be regarded as closely linked transactions. In the case in hand the credit period extended to the AE is a direct result of sale transaction. Therefore no question of credit period allowed to the AE for realization of sale proceeds without having sale to AE. The credit period extended to the AE cannot be treated as a transaction stand alone without considering the main transaction of sale. The sale price of the product or service determined between the parties is always influenced by the credit period allowed by the seller. Therefore, the transaction of sale to the AE and credit period allowed in realization of sale proceeds are closely linked as they are inter linked and the terms and conditions of sale as well as the price are determined based on the totality of the transaction and not on individual and separate transaction. The approach of the TPO and DRP in analyzing the credit period allowed by the assessee to the AE without considering the main international transaction being sale to the AE will give distorted result by disregarding the price charged by the assessee from AE. Though extra period allowed for realization of sale proceeds from the AE is an international transaction, however, for the purpose of determining the ALP, the same has to be clubbed or aggregated with the sale transactions with the AE. Even by considering it as an independent transaction the same has to be compared with the internal CUP available in the shape of the credit allowed by the assessee to non AE. When the assessee is not making any difference for not charging the interest from AE as well as non AE then the only difference between the two can be considered is the average period allowed along with outstanding amount. If the average period multiplied by the outstanding amount of the AE is at arm’s length in comparison to the average period of realization and multiplied by the outstanding from non AEs then no adjustment can be made being the transaction is at arm’s length. The third aspect of the issue is that the arm’s length interest for making the adjustment. Both the TPO and DRP has taken into consideration the lending rates, however, this is not a transaction of loan or advance to the AE but it is only an excess period allowed for realization of sales proceeds from the AE. Therefore, the arm’s length interest in any case would be the average cost of the total fund available to the assessee and not the rate at which a loan is available. Accordingly, we direct the Assessing Officer/TPO to re-do the exercise of determination of ALP in terms of above observation.”
Thus, it is clear that the Tribunal has taken a view that the transaction of allowing the credit period to the A.E. on realisation of sale proceeds has to be considered along with the main international transaction in respect of sale to A.E. A similar view has been taken by the Tribunal, Delhi Bench, in Kusum Healthcare Pvt. Ltd. (supra), wherein the Tribunal, vide Para–7 to 10, held as under:–
“7. We have heard rival submissions and perused the material on record. An uncontrolled entity will expect to earn a market rate of return on its working capital investment independent of the functions it performs or products it provides. However, the amount of capital required to support these functions varies greatly, because the level of inventories, debtors and creditors varies. High levels of working capital create costs either in the form of incurred interest or in the form of opportunity costs. Working capital yields a return resulting from a) higher sales price or b) lower cost of goods sold which would have a positive impact on the operational result. Higher sales prices acts as a return for the longer credit period granted to customers. Similarly in return for longer credit period granted, a firm should be willing to pay higher purchase price which adds to the cost of goods sold. Therefore, high levels accounts receivable and inventory tend to overstate the operating results while high levels of accounts payable tend to understate them thereby necessitating appropriate adjustment. The appropriate adjustments need to be considered to bring parity in the working capital investment of the assessee and the comparables rather than looking at the receivable independently. Such working capital adjustment takes into account the impact of outstanding receivables on the profitability. In this regard, the reliance is placed on the following rulings wherein the need to undertake working capital adjustment has been appreciated by the Hon’ble Tribunals :
• Mercer Consulting India Pvt. Ltd. [TS-170-ITAT-2014(DEL)] • Mentor Graphics (Noida) Private Limited [109 ITD 101] • Egain communication (P) Ltd. [ITA No. 1685/PN/2007] • Sony India (Pvt.) ltd. [2011-TII-43-ITAT-DEL-TP] • Capgemini India Private Limited [TS-45-ITAT-2013(Mum)-TP]
8. In view of the above, a working adjustment appropriately takes into account the outstanding receivable. Therefore, the assessee has undertaken a working capital adjustment to reflect these differences by adjusting for differences in working capital and thereby, profitability of each comparable company. Accordingly, while calculating the working capital adjusted, operating margin on costs of the comparable companies, the impact of outstanding receivables on the profitability has been taken into account. If the pricing/ profitability of the assessee are more than the working capital adjusted margin of the comparables, then additional imputation of interest on the outstanding receivables is not warranted.
The assessee had undertaken a working capital adjustment for the comparable companies selected in its transfer pricing report which was also submitted with the Ld. TPO. A snapshot of the result is provided below: Segment Name Appellant’s Margin (OP/TC) Working capital adjusted margins of comparables (OP/TC) Manufacturing Activity 46.33% Trading Activity 11.84% 17.44% 8.36%
The above analysis empirically demonstrates that the differential impact of working capital of the vis-a-vis its comparables has already been factored in the pricing/profitability of the assessee which is more than that working capital adjusted margin of the comparables. Hence, any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified.”
Following the orders of the Tribunal, we set aside this issue to the record of the Assessing Officer / Transfer Pricing Officer and direct to re–do the exercise of determination of arm's length price in the light of the above decisions of the Tribunal. The grounds raised in this cross objection are allowed for statistical purposes.
7.4.1 On perusal of above we find that the Tribunal has decided the issue in favour of the assessee. Therefore, respectfully following the order of the Tribunal, we set aside this issue to the record of the Ld. AO / TPO and direct to re–do the exercise of determination of ALP in the light of the above decisions of the Tribunal.
In the result, appeal of the assessee is partly allowed for statistical purpose.